By Russell Gold And Angela Chen
Shares of Halliburton Co. dropped sharply Monday after the
company announced it would buy Baker Hughes Inc. in a $34.6 billion
stock-and-cash deal that combines two of the world's largest
providers of oil-field-services.
Investors reacted negatively to the rich price Halliburton is
paying for its smaller rival; Halliburton's offer of $78.62 a share
is a 31% premium to Baker Hughes's closing price Friday.
Halliburton shares dropped as much as 9.5% in Monday morning
trading, although they recovered slightly to $50.25, down 8.7% from
Friday's close. Baker Hughes shares rose almost 11% Monday, to
$66.43.
Analysts also raised concerns about the sizable $3.5 billion
breakup fee Halliburton agreed to pay if the deal isn't completed
because of antitrust issues. The two companies have many
overlapping businesses, including hydraulic fracturing of oil and
gas wells and computer-controlled horizontal drilling. They also
drill in many of the same regions, from U.S. shale fields in Texas
and North Dakota to the deep waters off the coast of Brazil.
Dave Lesar, chairman and chief executive of Halliburton, said he
was ready to fight for regulatory approval. "We have the very best
in antitrust counsel," he said, adding that "we are prepared to be
cooperative with regulatory authorities."
If required by regulators, Halliburton said it would divest
businesses that generate up to $7.5 billion in revenue.
The deal, which could help the companies contend with falling
oil prices, comes after weeks of discussions that at one point
turned hostile. The companies wouldn't say how the deal was sealed
over the weekend but Halliburton appears to have sweetened its
offer.
"We bargained hard with each other, and at the end we got a deal
that is good for the shareholders," Mr. Lesar said.
Martin Craighead, chairman and chief executive of Baker Hughes,
said combining the companies would be good for customers. "I see
the potential to have the best oil-field services company that has
ever existed, full stop," he said.
Upon the deal's completion, expected in the second half of 2015,
Baker Hughes shareholders will own about 36% of the combined
company. The new company will have a combined board of 15 members,
including three from the Baker Hughes board.
Achieving a friendly agreement was important for a deal that is
likely to face antitrust scrutiny. Skeptical regulators can be
harder to win over without a willing merger partner also eager to
persuade the government to bless the deal.
The companies face a world where drilling for oil and gas has
become increasingly expensive and competitive--and falling crude
prices are only adding to the pressures on oil-field services
firms. Those trends, industry experts say, likely spurred
Halliburton to approach its smaller rival.
Exploration around the globe is starting to contract. Big or
small, some energy companies are demanding lower prices from their
oil-field servicers in the face of crude prices that have fallen
from over $100 a barrel to under $75 and show no signs of a quick
rebound.
Combining the companies will create a new oil-field-services
giant that can offer lower prices to customers, executives from
both companies told analysts Monday morning.
Mr. Lesar said hydraulic fracturing in North America will be a
key area where the combination of the two companies will result in
big savings.
"The integration teams are moving rapidly," Mr. Lesar said. "In
particular in hydraulic fracturing, where we can our combine
logistics networks."
A takeover of Baker Hughes would create a global giant better
able to compete with Schlumberger NV for huge overseas projects.
The three companies "have been in a knife fight the past few
years," analysts at Tudor, Pickering Holt & Co. said.
The merger would bring together two companies which have
competed against each other for a century. Baker Hughes traces its
corporate roots back to 1907 when Rueben C. Baker formed a company
in the California oil fields to sell the drilling tools he
invested.
In 1919, Erle Halliburton founded a company that focused on
cementing--a key part of drilling and finishing wells--in Oklahoma.
Schlumberger, Baker Hughes and Halliburton are often referred to as
the "Big Three" in oil-field services. All three operate
globally.
With global companies trimming their spending and U.S. companies
"about to confront a very hard landing, major consolidation in the
oil service sector has become an imperative," said Bill Herbert,
managing director of Simmons & Co. International, an energy
investment bank.
Relations between Halliburton and Baker Hughes turned hostile
last week, but even what transpired in the preceding month is a
point of contention between the two oil-field-services
companies.
Mr. Lesar dismissed concerns about antagonism between the fierce
competitors, both of which are based in Houston. "There is always a
bit of theater when these things come together," he said.
On a pro forma basis, the combined company had 2013 revenue of
$51.8 billion, more than 136,000 employees and operations in more
than 80 countries around the world.
Halliburton intends to finance the cash portion of the
acquisition through a combination of cash on hand and debt
financing.
Dan Molinski contributed to this article.
Write to Russell Gold at russell.gold@wsj.com and Angela Chen at
angela.chen@dowjones.com
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